May 25, 2018 Paths in Tax

A Conversation with Kathy Keneally

Kathy Keneally, a partner at Jones Day in New York, New York, is the former Assistant Attorney General, U.S. Department of Justice, Tax Division and a former Vice Chair of the Section of Taxation. She also chaired the Standards of Tax Practice and Civil and Criminal Penalties Committees of the Tax Section and served as a member of the Practitioners Advisory Committee to the U.S. Sentencing Commission. She’s a former Regent of ACTC and a Co-Chair of the National Institutes on Tax Controversy and Criminal Tax Fraud. This interview is derived from the Tax Bridge to Practice series “A Conversation with…” presented at the 2018 Midyear Meeting in San Diego, California.

Kelley C. Miller (KM): What led you to tax and law school? What was the process like? Did you have tax lawyers in your family?

Kathy Keneally (KK): The last thing in the world I wanted to do when I went to law school was be a tax lawyer.  I wasn’t just, “Oh, wow, I never thought of tax.” When I was in my second year of law school, I gave a guided tour to incoming 1Ls and actually pointed to tax books in the library and said, “If they really want to punish you, they make you read those.”

To the younger lawyers who are starting out, the core message is that your career will take unexpected turns, and I urge you to be open to them.  You’ll do some things and then another opportunity will come along and you’ll do something else. 

In my case, I never really planned on being a tax lawyer.  I actually thought I would go to law school to be a labor lawyer because my undergraduate degree is from the Cornell School of Industrial and Labor Relations.  I thought I would grow up to be a labor lawyer because that’s my family background.  I come from union people.  My grandmother was a seamstress, and my grandfather was a cab driver. 

So I started out thinking I’d do labor law generally, and that meant both the kind of negotiation work that people think of as central to labor law and the controversy work that inevitably happens in many labor issues.  Somewhere along the line I realized that there are likely people in the world who can do both litigation and transactional work, but that probably isn’t me.  For most people, there’s something at the core: you either wake up to the idea that you belong in the dispute arena or you find your fulfillment in problem solving.  Somewhere along the line, I realized that I was fiercely in the litigation category—interested in controversy, disputes, the trial lawyer category of work.  Labor law had too much negotiation and settlement and resolution in it for me.  I flirted briefly—I think for about a month or six weeks—with trying to be an antitrust lawyer, and that wasn’t working at all.  So I became a general litigator with Skadden and then also started to do pro bono criminal cases.  Then someone said to me, you know, you can actually do criminal defense work professionally.

So I went to the Kostelanetz firm because I understood it to be a white collar criminal defense boutique.  It had a number of former prosecutors who were doing securities law defense and other things, but the core of the firm always was and remains tax defense and tax litigation.  At some point, I realized that the same things that engaged me about criminal defense work—vindicating the rights of those who were caught up in the justice system—also applied when the work was vindicating the rights of taxpayers.  I also recognized that the civil side of tax was as engaging as the criminal side of tax.  Both have been a part of my practice ever since, though sometimes it’s nice to step away from the criminal side so that it is only about money as opposed to the high stakes in criminal defense. 

That was my backward path to becoming a tax lawyer.

KM: You were in private practice for about a decade before you went to do your LL.M. in Tax, is that right?

KK: That’s right.  I was probably in practice five or six years before I started in the program.  I did the LL.M. at night.  I did it as slow as was humanly possible.  I took one course every semester and one course over the summer.  It took me five years to get through the LL.M. program because I was working.  And I wasn’t working as a transactional tax lawyer.  So it was different. 

Why the LL.M. program? One of my mentors at the time was Jules Ritholtz, when the firm was Kostelanetz & Ritholz.  Jules was a force of nature who co-founded the Civil and Criminal Tax Penalties Committee.  He was a force in the ABA Tax Section—just an amazing person and a difficult human being and a challenging person to have as a mentor.  I was in a meeting one day with Jules listening to him give advice to a client, and I realized that I could practice for 50 years without being able to do what Jules was doing.  I needed more substantive knowledge than I was going to get in day-to-day.  The paths to that were to be a CPA, which was not in the cards at that stage, to get experience through government service, or to do an LL.M. degree.  I was enjoying being in practice at Kostelanetz at the time, so I chose the LL.M. program as a way to become more familiar with substantive tax.  There was that “spark” moment when I realized, “Okay, the people who are really succeeding did something more than what I’m doing and I need to do that something more.”

KM: Was there some type of course work, were there certain classes in the LL.M. program that you were particularly drawn to or areas that you decided to focus on?

KK: Not at all.  In fact, in making this decision I didn’t think anyone cared whether I had an LL.M. or not.  I was so uncertain of what I was ultimately going to do that I was even considering leaving the firm and doing civil rights work full time.  I thought nobody knew this.  I thought I was secretly having these conversations as I was trying to make a decision.  When I went into Jules’ office to tell him that I wanted him to be a reference for me to apply for the LL.M. program, he thought I was coming in to tell him that I was leaving to go off and do this civil rights work, and he was ready to talk me out of it.  I said, “Jules, I’m applying to the NYU LL.M. program.” He said, “We’ll pay for it.” That was something the firm had never done before in its history and something he just thought he had to put out there in order to convince me not to do this other thing.  I found that out later, when I told Bob Fink (one of the other partners) that Jules had agreed to pay for the LL.M. program.  He was like, “Yeah, he thought he had to bribe you out of this other thing which you never wanted to do!”

I guess the moral of that tale is to play your cards carefully.  But I’ve got to give credit to Bob and to Jules.  They were very clear.  “We don’t care if you get the degree.  We don’t need you to have the credential.  But it’s great to get the education.”

I went into the LL.M. program with that rare grace of being able to go to school and say “I’m here simply to learn what I think I need to know.” To me, as a controversy lawyer, that’s really important.  I can be litigating a partnership issue today, and I can be litigating and talking about transfer pricing tomorrow.  I can be dealing with OID the next day.  There was no way I was ever going to become an expert in any of those areas, but it is extremely helpful to understand the concepts that underlie them, so that when I’m brought into a case, I can understand what is going on.

KM: It sounds like it was Jules and Bob who had the greatest impact on your career.  Were there other people over the years?

KK: There’s no way that I’m going to mention Jules and Bob without also mentioning Boris and Jack.   Boris Kostelanetz was the grand Dean of all of this.  I mean, Boris was just legendary throughout and he was remarkable.  It was a grace to be there while Boris was still engaged in the practice.  Jules and Bob Fink I’ve already mentioned.  Another is Jack Tigue, who eventually became one of the named partners at the firm of Kostelanetz Ritholz Tigue & Fink.  Jack was also a great mentor.  He was a CPA, but his practice was a bit broader and he brought me into a lot of other things.  To this day there are times when I am in a meeting and I hear myself say something and realize that I sound just like Jack.

I’ll give you an example.  The other day, I said something to an associate who works with me regularly more harshly than I would have intended.  I actually said, “Oh, my God, I’ve become Jules.” And I apologized to him.  “I never meant to do that.” And his answer back was, “Well, it made you tougher.  I need to get tougher.”

The four of them were a remarkable influence.  There wasn’t a day when I was working with them that I felt anything other than encouraged to be the best lawyer that I could be, even when they were critical or challenging or difficult. 

I don’t think I can sit here and fail to acknowledge what it means to come up through this profession as a woman.  I don’t think it ever occurred to my four mentors at Kostelanetz (and they never let it show that it occurred to them) that my being a woman meant I could do anything less than the guys could do.  I experienced no sense of discrimination or limitation.  To the contrary, I felt pushed out of whatever my comfort level was to move on by all four of them.  And I find that remarkable because I have not found that to be true at other places.  I found that to be a problem at other firms, and it came as a shock to me. 

Because those guys were just like, “Here’s how you become a good and strong lawyer.” At the time I was quiet, soft-spoken. They were like “Yeah, get out of that.  You know, push yourself out of that.” And so I’m incredibly grateful to them.

KM: It’s an incredible master class that you had.

KK: When I first got to the firm there were these cases that were predominant throughout New York at the time.  The guy who was at the center of the case was a Hasidic rabbi and his son-in-law.  For years in New York, this became known as a rabbi scheme, just because the biggest case that New York ever saw involved a rabbi.  This rabbi and his son-in-law were selling fraudulent invoices.  Basically, they would issue the invoice, you would pay the invoice by check, and you would get 80, 90 percent back in cash.  That really works well from the tax evasion standpoint because you’ve got the deduction for cost of goods sold, the “goods” which you’ve paid for in connection with that invoice, and you’ve got cash that you’ve now pulled out of the business for whatever you want to use it for.  The rabbis are just, you know, taking their 5 to 15 percent. 

When I got to the firm, it was representing maybe a dozen of the companies that had bought these invoices.  It was a classic hub and spokes conspiracy from a criminal standpoint.  This was a remarkable experience for me.  Kostelanetz had the largest concentration of these cases, so I got to meet all the other criminal defense lawyers in New York who were handling them because I became the repository of a lot of knowledge.  We realized fairly early that there was a potential conflict and that each client needed to sign a conflict waiver to understand that the firm was representing other people involved in the investigation and that the clients would be informed.  It was a waivable conflict and they needed to waive the conflict.  So one of the very first things I did at the firm was draft that conflict letter.

There were three or four other partners at the firm, who also were good mentors at the time: Larry Feld, Peter Zimroth, Ed Dawes.  Each of them had to send out this letter, so I watched each of them do something different with the letter.

Bob Fink sent the letter out the way I drafted it.  To this day, I regret it had one typo in it.  Bob just read the letter, said basically “good,” signed his name and sent it.  God bless him for that.  But he didn’t catch the typo that everybody else caught.  Jules edited the letter and to this day, I don’t understand why he did it, but I had words like buyer/seller in it and he changed it to words like vendor/vendee, because that made sense to him.  Jack made the letter very personal.  Glad to have seen you at dinner last week, blah, blah, blah, blah, blah, blah.  Here’s an issue I want to bring up with you.  Peter Zimroth, I will always remember, became very upset that we weren’t sending out identical letters when he came in with his heavily edited version of the letter.

What I learned from that was there’s no right way to do anything.  You take from your mentors what you take from them, but there are equally valid ways to accomplish something.  The letter worked no matter which iteration of it was used: the core paragraphs remained the same, the points made in the letter remained the same.  But it was a remarkable insight into each of them, you know? It illustrated how the differences in their personalities indicated what each would expect from me.  And I learned to proofread anything that I was giving to Bob more carefully.

It also showed me that I wasn’t going to perfectly meet everybody’s expectations because people bring what they bring to the practice.  But they passionately loved what they did, so it was contagious. 

KM: I want to talk about when you left the firm and your decision to do other things.  You’ve had an incredible career – a career that goes from private practice into the government and back to private practice.  For many attorneys in their career, there will come a time when they consider those moves and whether it makes sense.  Can you explain your thought process behind making these career moves?

KK: The question why I left Kostelanetz is one I don’t know that I can answer anymore.  It was a long time ago, and a lot of factors played into it.  They remain friends and colleagues and part of what I do every day. 

I will say this, not as an answer to that question, but in that context.  There is a point where you need to move past your mentors and sometimes that means you have to move away.  I think you need to keep growing through your entire career.  There’s never a point where you don’t need mentors, but there is a point where you have to believe in yourself enough to say “I can do this without you.”

I’m not sure that there’s a magical moment.  Again, I’ll just credit Kostelanetz for this.  There were enough times when—because it was a small firm and somebody had to cover something—I had done things on my own that I felt like “You guys didn’t see it because you weren’t there, because you were busy trying a case and I had to keep this one going.  And I’ve done all these things.” You begin to realize you’re fine doing those things without somebody watching.  You just need to find your own voice and move forward.  It just begins to happen.  As you start to become professionally known on your own, as people start to recognize who you are, as they start to bring you in instead of the people that you viewed as your mentors, you grow into it.

I think I’m going to think about that question for the rest of the day.

KM: I want to talk about your time with the Department of Justice (DOJ) because it’s such an interesting role.  I think many young lawyers and older lawyers look at the DOJ and look at the Tax Division as a place that they might want to spend time in a career.  Can you talk about your decision to go to DOJ, your time there and what you feel were some of the best accomplishments of that time?

KK: Well, the decision to go there came because the opportunity presented itself.  Quite literally, I was serving on the Tax Section council at that point, and Miriam Fisher, who is in D.C.  at Latham and is just a phenomenal tax litigator, came up behind me.  I had my laptop in front of me.  I was trying to keep my bagel from falling on the laptop and Miriam whispers in my ear, “Do you want to be the AAG?” And I was like, “Can you do that?” The White House had actually called her and she, for personal reasons, could not.  The third time they called her, they said, “Can you give us the name of someone like you?” That’s how it started.  We all knew the vacancy was there, but I hadn’t thought about it.  It just happened.

After I talked to Miriam, I called my husband to say, “She wants to put my name in.” He said, “Yeah, you have to do it, you know? I mean, you just need to do that.” Now, I’m a New Yorker.  I live in New York.  I never left the city.  I took the 6:00 a.m., the Acela, down every Monday morning—the high speed train from New York to Washington.  And the 6:00 p.m. train back every Friday night.  I am remarkably grateful to my husband that he was patient through all of that. 

It was an extraordinary experience.  I’ve never worked with more dedicated, mission-oriented, and talented people than those at the DOJ Tax Division.  I have unending respect for everybody there, from the secretaries to the deputies and especially for the frontline litigating attorneys there.  It was an absolute privilege to work with that group of people, and I know that everybody who’s been in and out of Chief Counsel’s office and in the various offices will feel the same.  The Service has just got so many dedicated, mission oriented people in it. 

One of the questions that you had sent me in advance was whether I would do anything differently if given the chance.  I don’t know that I would do my career differently because I like everything that happened.  The experience of government service is extraordinary and nothing matches it.  You can get all the LL.M.s in the world, but the hands-on will teach you so much more in that context.

KM: To go from being a practicing attorney, working cases and then overseeing a huge staff there, what was that like?

KK: It was mindboggling.  I mean, in my case, you take somebody who was never in government service at all and then you put them in charge.  And, you know, you’ve got to go into something like that with a degree of humility.  I was incredibly fortunate.  Now Judge Tamara Ashford was there when I got there.  She had extraordinary experience in and out of the IRS.  Ron Cimino was the Deputy for Criminal at the time.  I knew Ron from before and Ron’s breadth of experience and patience was tremendous.  It’s similar to the question you asked before.  You spend some amount of time absorbing what they’re telling you and what they know and then at a certain point you realize you have to stand on your own feet and say, okay, but I’ve got the title, I’ve got the responsibility, and I will make the judgment call.

You know, another story just popped into my head.  The AAG’s office has a very large conference room that connects to it.  I was there for about two weeks and there had been this series of meetings going on in the conference room.  This was effectively my conference room and people were meeting in it.  So I asked what they were doing in my conference room.  The issue was identity theft.  I knew nothing about identity theft at the time.  We had a briefing with all of the people at the Service and the Division who were working on the issue, at the end of which I realized that this is a huge problem that somebody has to do something about.  And then I realize “Oh, right, that’s my job now.” So, yes, there was a learning curve, but eventually, I found my way.  Eventually we changed some of the Division’s policies so that we could prosecute cases faster because that’s what the local U.S. Attorneys’ Offices needed.  We created more information flow between the Division and the Service so the Service could improve its systems based on what the Division was learning through the prosecutions. 

We came up with the acronym “SIRF” (Stolen Identity Refund Fraud).  We created a group within the Division to handle all of this.  Rather than call themselves a task force, they decided they were going to call themselves the Stolen Identity Refund Fraud Advisory Board, for which the acronym was “SIRF Board.” At one point when they had won an award, the award was given by the Attorney General in his office with the department photographer present.  After the first official picture was taken, I said, “You know, these guys are the SIRF Board.” And there is a photograph.  I’ve got a copy of it in my office.  Eric Holder dropped down into a surf pose and said, “No, I mean it, guys.” And everybody else dropped down into the pose and the photographer took that picture.

So, that’s what it means to work for the Department of Justice—at least in the Holder years.

KM: After you left the DOJ, you went back into private practice.  How do you see the practice, going forward? With tax reform encompassing so much of our lives for the last six weeks, are there trends, types of cases or areas in particular that you think will continue to be hot areas? I’m just curious about your thoughts on that.

KK: Well, in terms of enforcement, I think you can see where the Service has been heading, which goes hand-in-hand with the international impacts of the new statute.  Certainly while I was at DOJ, we saw not only the use of bank accounts outside the United States to evade U.S. taxes, but also the use of structures to keep money outside the United States on the extreme end where there was criminal intent.  I think enforcement will be unrelenting in that area.  The Offshore Voluntary Disclosure Program has brought in so much information that is going to go on for a long time. 

On the criminal enforcement side, you need to look at where the money goes.  When we were looking at the issues with the Swiss Banks, that was the question we were always asking.  We knew the money had, to some degree, left Switzerland and certainly had left the Swiss banks that had U.S. presence.  And now crypto currency is adding a whole new layer of complexity.  I think some of the money will go into things where the money has always gone—into real estate and art and jewelry and things that you can move in this world as easily as you can move currency—or maybe more easily.

Then you move into what has been a focus of the Service for a very long time, which is high-wealth individuals.  For a long time that has meant looking at not just people who have money, but people who have a global footprint, which overlaps with international initiatives.  When the Service originally announced this program, they used a word that was mindboggling to hear from the IRS: the word was “holistic.” The Service is taking a holistic approach to looking at taxpayers.  They look at, for example, the LLCs and the partnerships and the whole picture for the taxpayer and particularly taxpayers with a global footprint and what’s going on there in terms of whether it makes sense in the flow of money.  You go from there to the fact that we’ve got new partnership audit rules now, which is what the Service wanted.  Presumably they’re going to use them to make it easier than TEFRA.  They’ve got this nice shiny useful toy.  So you would think that there would be enforcement there.  And then international has been part of the focus for a very long time.  I mean, to some degree the “I” part of LB&I has swamped the other parts for some time so I would think you’re going to see international enforcement.

But it’s going take some time until you see the enforcement under this statute.  There are a lot of questions about what the statute means, and the parts of the statute that have gotten all the press, obviously, are the things that affect individuals because that’s what the media focuses on.  But the core of this Tax Act is international tax reform.  We have a complete paradigm shift in how we are thinking about taxation of multinational companies.  We’ve become territorial instead of global, which is a remarkable change.  And there’s a lot of complexity in this law.  I know that they talked about the statute going through very quickly, but a lot of this has been out there in theory and people have been looking at it for a long time.  Nevertheless, there are anomalies.  There are places where the statute could have been written more clearly.  There are places where the statute is inconsistent with what was already in the Code.  I mean, everybody’s going to look and there’s nothing wrong with following the law to your tax advantage, but everyone’s going to be looking at that tax advantage.  The Service is going to need to come behind that and figure out where it wasn’t just to the advantage.  So I think that’s where you’re going to see most of it.

There’s a lot of work to be done in the coming years.  And that’s an understatement.  And for this, it is essential for this country that the Service receive more resources.

KM: It’s a good question to end on because I do want to ask you one more thing.  With all of the opportunity that could be created for tax lawyers, with all of these ramifications of federal tax reform, what advice would you have? What is your best advice for somebody new to practice to be the best practitioner that they can be?

KK: Enthusiasm.  If you’re not enjoying what you’re doing, you’ve at least got a law degree, you’ve got some resources available to you.  Figure out something else to do.  This brings me back to the beginning, right? I mean, I figured out even before I got out of law school that labor law wasn’t going to work for me.  I figured that out as a summer associate.  I figured out fairly quickly that antitrust wasn’t going to work for me.  I never expected tax would.  If tax is what intellectually interests you, there are a lot of different ways to be a tax lawyer.  Do what brings you pleasure.  You spend so much of your life involved in your work, you will be better at what you do if you are fundamentally enjoying what you’re doing. 

KM: Well, I just want to thank you.  I know for me, personally, you have always been someone I have looked up to since my earliest involvement in the Section many years ago and with incredibly good reason.  I think you’re a gift to all of us, especially to women in the Section.  You’ve been an incredible role model in always being open to answer questions and helpful to anyone who comes up to you.  I know that for myself as well as others who have sought your advice.  And so I just want to thank you so much again for sitting down for this hour to speak with us.

KK: Thank you.  The thought I want to leave with is this.  I probably was very soft-spoken when I was younger.  I needed to be pushed; I needed a lot of things.  From my vantage point now, I can assure you that a lot is attainable and that you should never sell yourself short.  The tax bar is an extremely welcoming place to anyone who seeks it out.  The tax law provides new and interesting challenges all the time.  With the new law, this is the perfect time for young tax lawyers to make a mark.  Just go for it.